Monthly Archives: July 2018

Post navigation

The Q2 growth number for the second quarter was disappointing in France. It was just 0,158% (non annualized) which is rounded at 0,2%. It’s the same figure than in Q1 (0,153%).

Carryover growth is just 1.3% for 2018 at the end of the second quarter. The government growth target in the 2018 budget is 1.7%. This is attainable if growth is at 0.55% in Q3 and in Q4. We can’t imagine the reason of this stronger momentum during the second half of 2018.

Households consumption is the weakness of the French growth since the beginning of the year. Change in the purchasing power was negative in Q1 for fiscal reason (higher taxes) and was probably negative also in Q2 due to a higher inflation rate. Corporate investment was higher in Q2 (good news) after a very weak number in Q1.

For 2018 we can expect a growth figure close to 1.5% which will be way below the 2.3% seen in 2017.

This mean that the public deficit target at 2.3% of GDP will not be reached. It will remain close to its 2017 level at 2.6%.

Discussions on wage dynamics in the Euro Area. The momentum is now higher (2%) but not sufficient to push core inflation on the upside. The enigma is not solved yet. That’s the analysis of this NY Times article.

Nevertheless, the example comparing France and Germany in the article is not totally convincing. There is still a lot to understand on the labor market.

Workers may finally be getting a bigger piece of the economic pie — at least in Europe. Just don’t ask why, or whether it will last.

In the decade since the financial crisis, much of the global economy has recovered and is back on stable footing. Companies are reporting record profits, unemployment levels are plummeting and overall global growth is back on track.

These two graphs this morning in the “Daily Shot” of the Wall Street Journal show the lower world trade momentum. All the indicators converge to a lower dynamics. With US tariffs and retaliation the risk is an extended downward trend.

The virtuous loop seen in 2017 between trade and activity had an impulse coming from very accommodative monetary policies all around the world. There is no new central bankers’ impulse. It is even the contrary. Investors now expect that the next trend will be on the tighter side after the Fed.
Moreover the uncertainty associated with the lower global economic mood (from non cooperative strategies from the US, UK, Italy and retaliation measures) reduces the economic horizon and therefore the will to invest from corporate companies.

In other words, after a surge in 2017 coming from central banks’ impulse, there is a downside adjustment which is amplified by non cooperative behavior from many governments.
The main risk at the global level is a rapid growth slowdown. It could be sooner than later.

Interesting paper that explains the new main characteristic of fixed income markets is the lack of liquidity.

I think that one consequence of this lower liquidity is on capital mobility. And it will be mainly damaging for emerging countries which are already in crisis. It means that capital outflows observed since mid-April will not be reversed. No investors will take the risk of liquidity. This will be a persistent negative shock for emerging markets. Rules for emerging markets have dramatically(see here) changed but in the wrong direction

Jerome Powell said that the yield curve flattening was not a source of concern and that it wasn’t showing a risk of recession as the economy is following a strong trajectory.

This point of view can be challenged for at least two reasons

1 – A negative yield curve (10 year rate below 2 year rate on government bonds) has always been a signal of recession with a lead of 18 to 24 months. The following graph is clear. Each negative yield curve is followed by a recession with a lag. The current spread is lower than 30 basis points, almost one increase of the fed funds rate.

We expect this yield curve profile for the end of this year due to the tighter monetary policy and therefore we have a strong probability of recession for 2020.

2 – The yield curve flattening reflects higher short term rates and no strong expectations on the long duration side showing that investors do not forecast a bright and strong future.

The tighter monetary policy means that the funding of the economy will be constrained for consumers and companies. We’ve seen recently that companies’ debt (as % of GDP) is at a record high and that consumer credit is still increasing rapidly. The impact of higher short term rates will be negative for both of them.

On the real estate market, around 50% of the financing is coming from brokers whose funding is linked to short term rates. For them too the situation will dramatically changed.

Moreover, an expected tighter monetary policy has provoked higher mortgage rates which will be damaging for households as real wages are no longer creeping up.

The argument saying that “this time is different” must be related to the discussion Reinhardt et Rogoff had in their famous book “This time is different”. Investors always think that the situation, at the moment they live it, is different from what was observed in the past with same type of signal. Reinhardt and Rogoff just say that it is not different on financial markets. An unbalanced situation must be adjusted. Current sources of “this time is different” argument are based on the neutral and non observable long term rate and also on the Fed’s balance sheet operations that have an impact on long bonds through the Fed’s reinvestment of their portfolio proceeds

In other words, the impact of higher short term rates will be negative on the US private sector and could be the source of the expected lower momentum on the economic activity. It it just the impact of a tighter monetary policy as we’ve always seen it in the past. This time is not different.

A discussion of Jay Powell’s speech at the congress can be read in the following FT article